The Market Does Not Suffer From Excess Construction
Furthermore, the market does not suffer from excess construction. “There was huge overbuilding in the late 1980s which really hurt the market when we had a recession,” says Joseph Mathews, also a professor of real estate. “But for the most part real estate did not get overbuilt before the last downturn.”
Nor do developers’ plans seem excessive. One reason is that banks have become more conservative in their lending, requiring developers to show that their buildings will be fully leased. Another is that the soaring price for concrete and steel (a product of China’s massive construction boom) has made new construction costly. The result, of course, is limited supply at a time of growing demand, which suggests that prices have further to rise.
Ultimately, say many experts, investors should be asking how commercial real estate compares with other investments. And next to stocks and bonds, it remains attractive.
“If you do CAPM or other risk pricing models, you find that real estate remains 15 to 35% under priced based on its cash stream and its risk profile relative to other alternatives,” says professor. In other words, not only does real estate give investors a better current income than debt or equity, but it’s safer.